Al Sibani

•  Margin financing enhances liquidity  and trading activity on the MSM

• Enhanced liquidity attracts investors by  increasing buy and sell transactions

• Importance of  having internal controls and qualified staff to manage margin financing.

• The company shall ensure the client is aware of the risks attached to margin financing

• Margin financing includes the companies in the regular and parallel markets

Ahmed Sulaiman Al Sibani, Director of the Department of Compliance and Inspection  at the Capital Market Authority said margin financing contributes to  increasing liquidity levels in the stock markets and activate trading transactions because it is a financial facility provided to the client to invest in the market collateralized by the securities  the client contributes as initial margin which is 50% of the total value of the portfolio in accordance with  certain provisions regulating the relationship  between the client and the company which must be licensed to carry out margin financing activity by CMA.

Importance of Margin Financing

On MSM’s  experience in regulating margin financing Al Suibani pointed out  it started early whereas  brokerage companies  were providing the facility to the clients to attract the largest number, however, such activity was  not regulated and there were no limits for financing or follow up of  the margins. He added,  to maintain the market integrity and the integrity of brokers from the risks of clients’ default in payment of their obligations and the impact of the same on the  market and the  financial position of the companies,  margin financing rules were issued whereby margin financing can be provided to protect both parties.

Al Sibani added the recent amendments were made after assessment of the previous rules and the developments in the local and global securities markets and assessment of the  points of weaknesses  to provide adequate protection for market participants to enhance the  regulations for more flexibility required for trading transactions in the market and for risk management in view of market volatility.

Financing in the Regular and Parallel Markets

Al Sibani added the  recent amendments to the margin financing rules are more flexible with regard to the available options in the trading transactions to achieve the investment goals in addition to the benefits to the brokerage companies due to increased trading volumes. He said the  new rules included expansion of the base of the companies license to carry out margin financing activity to include the companies listed on both the regular and parallel markets not only the companies listed on the market index which are 30 companies. This would allow for more opportunities in trading volumes and more active market beside increasing the funds the licensed companies are providing to the client to RO 500,000  to pave the way for the clients with higher solvency to avail the investment benefits in the market .

Increased Margin Maintenance Term

Ahmed Al Siyabi said the  new amendments included increasing the  maintenance margin in 5 trading days instead of 3 so as to allow the broker to meet the margin maintenance ratio from the client. The licensed companies were allowed to deal with the securities listed on the regular and parallel markets based on standards set out by  the companies.

Where the actual margin falls below the agreed maintenance  margin the legislator  obligates the broker to inform the  client  immediately  after the trading session  by any of the communication means to top up the actual margin to the level of the agreed maintenance margin in not more than 5 trading days from the trading date on which the fall had occurred so as the broker can meet the margin maintenance level because transferring cash from the client to the broker’s account will take longer than the previously allowed term.

50% of the Total Assets

On the other hand the amendments allowed the company licensed  for secured financing  to give financial facilities for trading purposes  provided the client pay the facilities in not more than 3 months from the date of the transaction. The company can give the financing from the company’s total assets not the net assets provided the financing shall not exceed 50% and the risks will be controlled through  capital adequacy requirements which were issued recently vide Administrative Decision No. 41/2016.

The amount the company is allowed to grant as financing has been increased to RO 500,000 from RO 250,000  provided the sum will not be more than 15% of the funds the licensed company provides for such activity.

Enhancing Regulatory Efforts

To regulate the relationship between the  client and the broker the Director of Compliance and Inspection said the broker shall not open more than one financing account for any client alone or together with his minor children or his enterprises, furthermore,  the amendments added certain rules obligating the client to acknowledge the other margin financing accounts  held with other companies and to undertake to report any future accounts. Minimum limit may be specified for the turnover of the portfolio and the required time. The broker may require the client to  pay and close the facilities account if unviable or for any other reason.

Responsibility of the Licensed Company

Al Sibani urged the  companies operating in securities and licensed to carry out margin financing to   exercise due diligence and to monitor  the maintenance of the  minimum financing margin so as the broker will not be forced to sell all the client’s shares to ensure payment of his rights which would lead to a large number of sell offers  resulting in price fall. The broker shall also ensure the client is aware of the risks and rewards attached to investment by margin financing including but not limited to high losses exceeding the amounts contributed at the inception of the contract. He asserted the companies are required to have internal controls and audit by furnishing qualified staff to manage margin financing accounts in accordance with the directives of CMA.

Article 130 of the Executive Regulation of the Capital Market Law provides the company licensed for margin financing (secured financing) may provide financing for investment in securities collateralized by securities held in the name of the licensed company pursuant to the rules issued by CMA, and Article 125 of the same Regulation provides for the minimum limit of capital of the licensed company.  It is noteworthy CMA has precluded the companies operating in securities from carrying out any financing facilities  other than margin financing and shall meet the  minimum requirement of licensing to carry out margin financing.